The Cost of Care

Funding the Cost of Care

We understand how overwhelming it can be in navigating issues that arise in later retirement years.  Whether in your twilight years or caring for an aging loved one, your preparation and approach could make all the difference.  We have noticed an uptick in inquiries regarding the best ways to navigate the long-term care landscape and thought covering the bases would be timely as we approach the one-year anniversary of launching Citadel Family Insurance Solutions.

Will I Need Care?

As we age, the likelihood of needing long-term care increases.  However, traditional health insurance policies typically do not cover the full cost of long-term care services, leaving individuals and their families vulnerable to significant financial strain. According to statistics, approximately 70% of individuals over the age of 65 will require some form of long-term care during their lifetime with the average duration of care lasting 3.2 years¹.  In California, the annual cost of in-home care could range from $40,000-$302,000 depending on the type of care needed².  Factoring in the average increase in cost of care from 2022 to 2023 of more than 6%, could impose a substantial financial burden on a family³.

How People Pay for the Cost of Long-Term Care

Since most people will need care during their lifetime, it is paramount to determine the best approach to funding the cost before it happens. Here are some common ways people pay for long-term care:

1. Self-Funding

Self-funding involves using personal savings, investments, or other assets to pay for long-term care services. This method offers flexibility and control over the choice of care but can quickly deplete financial resources.  Additionally, liquidating highly appreciated assets with a low cost-basis, such as real estate, incurs a large capital gain.  Using funds from a retirement account is subject to income taxation and may push people into a higher tax bracket.

• Savings and Investments: Many people use their savings accounts, retirement funds (such as IRAs or 401(k)s), and other investments to cover costs.
• Sale of Assets: Selling a home, stocks, or other valuable assets can generate the necessary funds.
• Advantages: Provides immediate access to funds, no need to qualify for financial aid, and more choices in care options.
• Disadvantages: Incurs disadvantageous taxes and can quickly exhaust savings and affect the financial security of the individual and their family.

2. Long-Term Care Insurance

Long-term care insurance is a specialized insurance product designed to cover the costs associated with long-term care services. These services include assistance with activities of daily living (ADLs) as well as care provided in nursing homes, assisted living facilities, or even in your own home. 

Activities of Daily Living (ADLs) are fundamental tasks that individuals typically perform daily, including bathing, dressing, eating, toileting, transferring, and continence. Long-term care policies often require clients to demonstrate impairment in two or more of these ADLs to qualify for benefits. Additionally, evidence of a cognitive impairment, such as Alzheimer’s or Dementia, may also substantiate eligibility to qualify for benefits

• Policy Features: Benefits vary but generally cover nursing home care, assisted living, home health care, and adult daycare.
• Premiums: Policyholders pay regular premiums, which can increase with age and health status.  Can be funded monthly, via a single premium, or may be available as a rider on life insurance policy or annuity.
• Advantages: Protects personal assets, relieves the burden of relying on family members to provide care, and offers more flexibility than Medicaid.
• Disadvantages: Premiums can be expensive, stringent underwriting, and policies can be complex with various exclusions.

3. Reverse Mortgage

Homeowners can leverage the equity in their homes to pay for long-term care through a reverse mortgage.  Since it is considered a loan, there is no tax on the money received.  If used for a qualifying expense, such as long-term care costs, the interest repaid on the loan is also tax-deductible.

• Access to Equity: Allows homeowners aged 62 and older to convert home equity into cash, which can be used for long-term care expenses. The loan is repaid when the homeowner sells the home, moves out permanently, or passes away.
• Advantages: Access to substantial funds, no need for medical approval as there is for long-term care insurance, no immediate repayment required for reverse mortgages, and continued home ownership.
• Disadvantages: Reduced home equity for heirs, heirs will need to pay off loan balance in order to keep it which would add a need for careful management of loan funds.

4. Medicaid

Medicaid is a joint federal and state program that helps cover medical costs for people with limited income and resources, including long-term care services.  Many people cannot qualify due to low income limits and asset restrictions.  The list of care facilities is limited and the quality of care is less robust than that offered through long-term care insurance.

• Eligibility: Varies by state, but typically requires individuals to have low income and limited assets.
• Coverage: Includes nursing home care, home health care, and other long-term services and supports.
• Advantages: Provides extensive coverage for those who qualify, reducing the financial burden.
• Disadvantages: Strict eligibility requirements, potential for estate recovery (where states can recoup costs from the deceased's estate), and limited choice in care facilities.

Summary

It's important to remember that everyone’s situation is unique when planning for long-term care. By tailoring strategies to fit your financial circumstances, health status, and care preferences, you can ensure that your specific needs are met effectively. Understanding the eligibility and benefits of various funding sources such as Medicaid, long-term care insurance, and reverse mortgages can help you make the most of available resources. Personalized planning also balances the need for long-term care with asset protection, helping preserve your financial stability and estate planning. This comprehensive approach not only addresses care needs but also considers emotional and familial impacts, leading to better outcomes for you and your family. Ultimately, a well-rounded personalized long-term care plan provides peace of mind and security for you and your loved ones, allowing you to focus on what matters most.

Sources:

¹ https://aspe.hhs.gov/reports/what-lifetime-risk-needing-receiving-long-term-services-supports-0

² https://www.payingforseniorcare.com/homecare/paying-for-home-care/cost-of-24-7-care

³ https://www.genworth.com/aging-and-you/finances/cost-of-care

* Investment advisory services offered through Van Hulzen Asset Management, insurance products and services through Citadel, an affiliated company. Any references to guarantees relate only to insurance products and are based solely on the claims paying ability of the underwriting company.